Addressing housing shortage requires setting right priorities

Chief Executive John Lee Ka-chiu is well aware of the importance of tackling Hong Kong’s housing problem. Of the four working groups that he has set up, two have to do directly with housing. 

For for-sale housing, we have been using a lottery system to deal with the acute shortage of Home Ownership Scheme (HOS) housing. For public rental housing (PRH), the queuing time for being granted PRH rises to 6.1 years on average. To tackle the problem effectively, correct understanding of the problems and setting the priorities right are both important.

First of all, we have to face the fact that our resources are limited. There is a need for “demand management”. Demand management for public housing means three things. First, we must not make public housing too attractive. In particular, we must not allow people any chance of profiting from public housing. Second, we must use our resources efficiently. If we fail to use our resources efficiently, we will create more demand for PRH flats. The wasteful use of the limited resources means the demands that would have been met with our existing resources would be crowded out, and that adds more applicants to the queue. Third, we need to manage expectations, so people will not apply for HOS housing because they think the prices will outpace their income.

Today, if we can provide affordable housing to both current Hong Kong citizens and future talents who want to make Hong Kong their home, we will also greatly strengthen our competitiveness as a financial and professional services center, and our innovative industries

To discourage profit seekers from applying for public housing, I would strongly advise that the special administrative region government announce, once and for all, that it will not privatize public rental flats. In any case, privatized PRH flats will create intractable management and redevelopment problems. I would also propose that households with a reduced number of members for different reasons should move to smaller flats, and that this should be written into the contract before the flat is rented.

I would recommend pricing new HOS flats at 10 times the annual median household income for households in Hong Kong. Given that the new HOS flats that I propose will be around 400 square feet for a family of four (standard being 100 square feet per capita, as compared with the PRH standard of 75 square feet per capita), and given that the median household income in the first quarter of this year stood at HK$43,500 ($5,540) per month, the average price per flat would be HK$5.22 million, or about HK$13,050 per square foot. Although HK$13,050 per square foot represents a significant discount from free-market prices for a new flat, it is not cheap, thus keeping demand at a manageable level. Those who cannot afford these prices should apply for PRH housing.

I propose that all those who work in Hong Kong should be eligible to buy these flats. The conditions, to be written on the land lease, are just that the owners must live in the flat and that they must not own other properties. These conditions, plus a housing quality standard set at an “adequate but not attractive” level, would encourage those with the means to look for better-quality flats in the private market. With vigorous demand for private housing, we can continue to elicit much revenue from land sales, rates, and profit tax from developers. We will then be able to preserve the fiscal revenues of the SAR and retain the “low tax rate” regime as stated in the Basic Law.

The new HOS flats can be resold freely without a need for land premium repayment anytime after purchase. Because these flats are available at affordable prices from the government to anyone who agrees to the terms stated on the land lease, resales are not expected to bring much profit to the owner. The profit motive to apply for the flats will be dampened. Since pricing is linked to income, the “fear of housing price outpacing income” will be dissipated, and thus the demand can be contained.

There may still be a worry that the government might not be able to deliver, as I propose to dispense with the means test, and to simply rely on “self-selection” to screen out those with the financial means to buy better flats. To bolster the government’s ability to supply housing, I propose that the government may use the Land Resumption Ordinance to recover land from private land holdings with a standard compensation formula. I had proposed the concept of a “warranted rate of return” in my doctoral thesis for land resumption based on the public interest. The “warranted rate of return” formula can be discussed with stakeholders (it could be inflation rate plus 2 percent per year, for example), but once the formula is agreed upon, we can save a lot of time in haggling between landowners and the government. If there is no record for the first-time-purchase price, we can consider a similar land parcel that has a transaction record and calculate it from there.

I would propose that anyone who wants to buy a flat from the government can make a down payment to indicate intention of purchase. The government will then make a commitment to delivering within five years a flat that meets the basic terms mutually agreed upon. The terms naturally cannot be custom-made, and instead of specific locations, the contract can simply specify availability of public transportation providing access to some central location within 45 minutes. To fend off expected opposition from local residents who worry about traffic congestion and excessive demand on community facilities, the government will commit to resolving these matters.

In the past, Hong Kong’s success as a manufacturing center had been related to our public rental housing program that had kept wages low. Today, if we can provide affordable housing to both current Hong Kong citizens and future talents who want to make Hong Kong their home, we will also greatly strengthen our competitiveness as a financial and professional services center, and our innovative industries.

The author is director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.